Last week Fannie Mae's board of directors released a statement responding to the findings of the Office of the Federal Housing Enterprise Oversight's (OFHEO) ongoing review of its accounting practices - putting Fannie in a bad light. Analysts said Fannie's current dilemma is not as grave as rival Freddie Mac and that the firm is expected to contest some or all of the OFHEO allegations.

In a report released last Monday to Fannie and posted on OFHEO's Web site last Thursday, it charged that for its derivatives transactions and hedging activities, the GSE applied non-GAAP compliant accounting methods and practices. Fannie also supposedly used an improper "cookie jar" reserve in accounting for amortization of deferred price adjustments under GAAP and tolerated internal control deficiencies. The regulator also accused Fannie of at least once deferring expenses, seemingly to achieve bonus compensation targets, and maintaining a corporate culture focused on stable earnings at the expense of accurate financial disclosures.

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